Wealth of Nations August 2007

Beyond Trade Adjustment Assistance

Workers who lose their jobs because of trade are no more deserving than workers whose jobs disappear for other reasons.
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This week Sens. Max Baucus, D-Mont., and Olympia Snowe, R-Maine, introduced a new Trade Adjustment Assistance bill. Aimed at helping workers who get sacked because of foreign competition, it would extend the current law, which expires at the end of September, for five more years. The plan is to provide more money for training and health insurance, and to broaden eligibility beyond manufacturing to service workers who lose their jobs to offshoring.

Congress has passed previous incarnations of TAA (it dates back to the early 1960s) as part of bargains granting the president fast-track authority to negotiate trade deals. The thinking was straightforward: Freer trade is good for the country, but there will be losers; aid for displaced workers will ensure that some of the gains are used to support the victims. TAA was a political bargain—between congressional trade skeptics and trade-promoting presidents, and between the country at large and those who lose out because of trade liberalization.

The new bill's prospects are uncertain. Because the Democratic-controlled Congress is in no mood to grant trade-negotiating authority to President Bush, some Republicans are grumbling that they might not support TAA, up till now a bipartisan endeavor. To try to block the law's extension looks wrong on the merits and, as a matter of political calculation, idiotic—but pause for a moment to ask whether TAA really makes sense.

Harvard's Greg Mankiw (a former chairman of the president's Council of Economic Advisers, and a loosely affiliated consultant to GOP presidential candidate Mitt Romney) poses two good questions about the program on his blog (Gregmankiw.blogspot.com). First, "Can you really tell whether a worker is losing his job due to trade or due to other forces, such as technological change?" Second, "Is a worker who loses a job due to trade deserving of a more generous safety net than a worker who loses his job due to other forces, such as technological change?"

The answer to the first is, not really. TAA is aimed at mass layoffs, such as plant closings, and these may have any number of causes. Only now and then will foreign trade or offshoring be solely or obviously to blame. In any case, most redundancies don't come from mass layoffs but from the smaller-scale restructurings that are part of any consistent effort to keep an enterprise efficient. In those instances, the trail back to underlying causes—trade, domestic competition, advancing technology, shifting tastes, whatever it might be—will be even harder to follow. As for Mankiw's second question, the answer is clear: No, workers who lose their jobs because of trade are no more deserving than workers whose jobs disappear for other reasons.

A humane attempt to help displaced workers should not concern itself with a forensic examination of the forces that brought about the firings. There should be no need for firms, unions, or workers to petition the Labor Department, adducing evidence that trade was to blame, and no need to restrict TAA eligibility to that narrow group. A study from 2002 attributed just 1.5 percent of job losses caused by mass layoffs to import competition. You could multiply that proportion by 10, allowing for the uncertainty, and the number would still be small.

The only rationale for confining worker assistance to the victims of trade is political: namely, that it might buy support for open international markets.

But lately, TAA has failed to do even that. Possibly, its existence makes the politics of trade more difficult by seeming to blame trade for dislocations that are really caused by other factors.

TAA has been ineffective by its own lights, because its rules restrict the benefits even among those who are broadly eligible. Last year the Labor Department ruled that 400,000 or so workers were eligible for TAA's benefits; fewer than 100,000 applied for them. Once workers are in the scheme, their access to particular benefits is further restricted by various qualifying conditions. One of the program's elements, for instance, is wage insurance. Qualifying workers who take a new job at a lower wage than they earned in their previous job can, for a time, get part of the difference repaid—as long as they are also over age 50, find a new job within 26 weeks of getting fired, and were aware of the benefit in the first place. In 2006, according to the Government Accountability Office, barely 6,000 workers received the insurance.

Altogether TAA cost about $1 billion last year. The new law, its sponsors reckon, would probably double that. To put this in perspective, the fiscal cost of the tax exemption for state and local bonds is roughly $25 billion a year. The cost of the Earned Income Tax Credit is about $50 billion a year. The expanded TAA's predicted cost of $2 billion a year is about what Belgium spends on overseas aid.

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